Markets Reverse Sharply on Feds Powell Statements, What Does it all Mean?

Thirty minutes in financial markets is a long time. Markets were relieved after the Federal Reserve again raised rates by 75 bp at their November meeting. Then Chairman Powell started talking and it all collapsed. The Nasdaq went from +25.45 at 10856.15 to negative to close -366.05 points at -3.36% at 10464.65. The 10-yr note yield fell to 3.98% but jumped to 4.11% after the close of the cash session. Traders had reacted initially to the tone of possible rate hikes slowing by selling the US dollar and buying equities indices after the release. Bonds and the US Dollar reversed hard and stock markets were routed.

Image via Vanity Fair

The market reversed its pricing of the terminal rate back to the upside and to 5.09% up from 4.93% after the initial relief move (it was at 4.6% terminal rate from the September Fed tendencies). The initial bullish interpretation basically hinged on the line “In determining the pace of future increases “. The Fed said they are prepared to adjust policy as appropriate and are highly attentive to inflation risks.

Clearly Powell wasn’t of that viewpoint, he made it very clear that inflation was not under control, the job market is strong, and it will be better to raise too high then not enough. It is almost a take no prisoners moment and to heck with main street. Powell’s messaging that incoming data since the last meeting suggests the ultimate level of interest rates will be higher than previously expected and that “there is more ground to cover” before it meets the test of being at a restrictive level.

The 3 takeaways from Powell’s press conference:

WSJ Nick Timiraos summed it up well:

1) The Fed could step down to a slower pace in Dec even if inflation data don’t improve much
2) If there had been new estimates of the terminal funds rate released today, they would have moved up
3) Not ready to talk about a pause

Key Powell comments

Powell: “The question of when to moderate the pace of increases is now much less important than the question of how high to raise rates and how long to keep monetary policy restrictive.”

Powell: The risks are asymmetric. If the Fed does too much, it can cut. If it doesn’t tighten enough, then you’re in real trouble.

Powell: “It is very premature to be thinking about pausing…. Very premature.”

How it all closed:

Stocks

  • Dow industrial average -505.44 points or -1.55% at 32149.79
  • S&P 500 index -96.41 points or -2.5% at 3759.76
  • NASDAQ index -366.05 points at -3.36% at 10464.65
  • Russell 2000 -62.25 points or -3.36% at 1789.13
  • Major averages closed at session lows.
  • All 11 S&P 500 sectors closed with a loss ranging from 1.0% (utilities) to 3.8% (consumer discretionary). 
  • Mega cap stocks suffered heavy losses. The Vanguard Mega Cap Growth ETF (MGK) fell 3.6% today versus a 2.5% loss in the S&P 500.
SPX Hourly Structure v KnovaWave
SPX 5 Minute Structure v KnovaWave

Bonds

  • The 2-yr note yield initially traded down to 4.44% but settled at 4.55% and jumped to 4.62% after the close of the cash session.
  • The 10-yr note yield fell to 3.98% but settled at 4.06% and jumped to 4.11% after the close of the cash session. 
Us 10 Year Note 5 Min Structure via KnovaWave

Foreign Exchange

After initially selling off the USD was trading near it’s highs vs all the major currencies with the exception of the USDJPY (the yen is the strongest of the major currencies) as stock markets closed.

  • The US dollar moved the most against the GBP (USD up 0.78% with the GBP the weakest of the major currencies. The GBPUSD traded above 1.1526 but reversed back to a low of 1.1387 at the New York close.
  • The EURUSD closed down -0.50% at a low for the day at 0.982153. The high was 0.99754 before the Powell talk.
  • The dollar is lower vs JPY at 147.80 is -0.32%. However, the USD bounced from a low of 145.65 prior to Powell talking. The post FOMC high was 147.96.
USDJPY 10 Minute Structure via KnovaWave

Energy complex futures settled the session higher.

  • WTI crude oil futures rose 1.6% to $89.82/bbl
  • Natural gas futures rose 6.9% to $6.55/mmbtu.

From here where do we go?

Fundamentally we know Powell is not worried about cooking the economy it appears, you may argue it is all about tempering inflation and that may be true. That goes along with the change in the statement. Some offer that this is because of the midterms coming up in the US, perhaps but it all subjective.

Watch the bond and currency markets, they will give hints. Look for key data shifts, we have the US jobs report Friday that’s a great start moving forward. ADP and JOLTS were hot (why equity markets plunged yesterday). Now your levels in the markets you trade. The S&P weekly, the bonds and the US dollar all traded like clockwork off support and resistance. Remember much of what is in the KnovaWave matrix calcs is picking up the math used in dominant algorithms. That is much ado of how it works.

Look for sentiment and dominant shifts, open interest and gamma levels. Keep an eye on dominant pundits. right now, WSJ Nick Timiraos has massive influence, follow him. Watch the Treasury curve, watch the EURUSD and USDJPY rates. Understand the key levels.

Today’s key S&P 500 levels 10 year note and USDJPY 60 mins. (Note your key weeklies are there in your trader’s market Weekly – they are dominant as we saw today)

Trade smart! @knovawave

Below is the FOMC statement of the day and the initial reaction. We now have large supply that caught on this, watch order flow on the key levels.


Federal Reserve FOMC Statement 

Fed Boardroom

Federal Reserve Announcement Wednesday 2 November 2022 14:00:00 ET

The FOMC raised the target rate by 75 basis points to 3.75-4.00% vs 3.00%-3.25%

Conference To Follow At 2.30 ET PM With Chairman Powell

Highlights

  • Decision was unanimous for raise
  • Recent indicators point to modest growth in spending and production
  • Repeats that the Committee is highly attentive to inflation risks
  • Repeats that ” The Committee anticipates that ongoing increases in the target range will be appropriate”
  • Highlights cumulative tightening and lags in policy

Market Reaction After FOMC

The US dollar moved lower

  • EURUSD up 70 pips since the release to 0.9940 and similar across the board for USD.

Stocks higher

  • US equities turned a decline into a 0.6% gain.

Interest rates have eased especially in shorter tenors

U.S. Treasuries saw fresh highs in reaction to the November FOMC Statement. Wall Street Journal’s Fed insider was quick to point out that the Statement noted that the cumulative effect of rate hikes will be taken into consideration when determining the pace of future increases. This is being viewed as an acknowledgement that a slower pace of rate hikes may become appropriate soon. The 10-yr note and shorter tenors trade just below their post-FOMC highs while the long bond has reversed its entire move, returning to levels from the early afternoon.

Yields After Release on Day:

  • 2-yr: -8 bps to 4.45%
  • 3-yr: -7 bps to 4.41%
  • 5-yr: -9 bps to 4.17%
  • 10-yr: -5 bps to 4.00%
  • 30-yr: -3 bps to 4.10%

November 2 FOMC STATEMENT CHANGES via @Newsquawk

The lines of note that change FOMC: “In determining the pace of future increases … the committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

The full statement from the Novemeber 2022 Fed Decision

Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.

Russia’s war against Ukraine is causing tremendous human and economic hardship. The war and related events are creating additional upward pressure on inflation and are weighing on global economic activity. The Committee is highly attentive to inflation risks.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 3-3/4 to 4 percent. The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve’s Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lael Brainard; James Bullard; Susan M. Collins; Lisa D. Cook; Esther L. George; Philip N. Jefferson; Loretta J. Mester; and Christopher J. Waller.

Implementation Note issued Nov 2, 2022

Source: Federal Reserve

From the TradersCommunity Research Desk